Buyout at a glance
- Removes the risks of investment, longevity, interest rate changes, inflation and future running expenses for the scheme.
- Typically covers all members of the scheme, both deferred and current pensioners.
We issue the member with an annuity policy and pay the member directly.
- Additional cover can be bought to cover any data risk, for example missing beneficiaries and/or data errors, providing more certainty for sponsoring employers.
- Enables the scheme to wind up.
What does it do?
- A buyout transfers the responsibility for meeting scheme members’ benefits to us, completely removing the risk and related liability from the trustees and sponsoring employer.
- Once a pension scheme has undertaken a buyout and we have issued individual policies to members, the scheme will typically wind up.
How does it work?
- The trustees pay a premium to us in return for a buyout policy. Under the terms of the policy, we agree to pay the benefits set out in the policy for the covered members until they die along with any death benefits, such as dependants’ pensions.
- We are required by regulations to hold surplus funds called 'capital reserves' to support the insurance policy. These reserves are set at a level such that we are expected to be able to meet the liabilities, even under extreme scenarios.
- Over a period of time, which can be six months to two years, the scheme will be wound up and we issue individual members with policies directly.
- Once individual annuity policies have been issued to members, the trustees and employer have fully discharged their liability in relation to the members.
What options are there?
- As an alternative to financing the insurance premium using plan assets, it is possible for the sponsoring employer to finance the buyout using an ‘asset-backed financing’ arrangement.
Your options is more detail
Case study of the TRW Pension Scheme's groundbreaking £2.5 billion partial buyout in July 2014 exploring how the trustees and sponsors brought together a series of initiatives, including liability management exercises and active transition management to deliver cost savings and pricing certainty.